Shopping in an Uzbekistani bukhara. Photo source: Alamy.
In Central Asia, financial stability is a figure of speech. The implosion of commercial banks in Kazakhstan nearly gutted the economy in 2008. Crisis returned in 2015 when the tenge weakened so calamitously that National Bank abandoned it to the foreign exchange market.
Figure 1 shows how financial chaos has affected market development in the strongest of the Central Asian economies, Kazakhstan. Its share of market capitalization largely stagnated from 2002, about when the transition to markets got off the ground in Kazakhstan, to 2020, the last year for which data are available from the World Bank. Market capitalization in GDP rose sharply in 2006, when global oil prices skyrocketed, and fell in the global financial debacle of 2008. After that, market capitalization fell again, especially in the period of low oil prices of the mid-2010s, then rose slightly. As of 2020, it was just 26%.
In contrast, market capitalization in the United States rarely fell below 100%. Although it too took a hit in 2008, it then rose fairly steadily, doubling to 193% by 2020.
Surely one reason for this difference in performance is that the banks are much better in the US. A firm can more easily borrow in the US to develop a big and profitable project than in Kazakhstan. And the stock markets are more developed and diverse.
Of course, no one expects Kazakhstan to rival the US as a financial center. But it is striking that despite periods of high oil prices, and generous government aid to certain commercial banks with political pull (hello, Halyk), market capitalization in Kazakhstan still flounders.
Figure 1: Market capitalization of listed domestic companies as a share of gross domestic product
Data source: World Bank
And the financial sector in Kazakhstan is a paragon compared to others in the region. The central bank in Turkmenistan is not even in the habit of publishing statistics. Figure 2 shows that in Tajikistan, more than a fourth of all loans were bad in the pandemic years.
Figure 2: Nonperforming loans in Central Asia
Data source: World Bank. Note: The ECA region consists of Albania, Armenia, Bosnia and Herzegovina, Georgia, Kyrgyzstan, North Macedonia, Moldova, Montenegro, Serbia, Turkey, and Turkmenistan.
By the standards of the region, Uzbekistan banks are efficient in that few of their loans are bad. Nevertheless, financial markets in the country are puny by Western standards. Uzbekistani consumers may illustrate this debility. In the long run, they spend three-fourths of an additional international dollar (see Table 1). (This currency adjusts for inflation and changes in the exchange rate). This is more than a Kazakhstani spends (.645) but less than an American (.823). Given high savings rates throughout Asia, a marginal propensity to consume in Uzbekistan of .763 need not surprise us.
The surprise is in the short-run marginal propensity to consume (see Table 2). It slightly exceeds 1. The typical Uzbekistani spends more than her income, by slightly drawing down her savings. Here we interpret savings broadly: It includes the forced savings of tax payments as well as voluntary saving. She restores her savings in the long run by saving one-fourth of another international dollar. Indeed, consumption over the long run in Uzbekistan is falling 945 million international dollars per year, controlling for income. This pronounced tilt towards spending behavior is not necessarily good in a transition economy that must develop its services sector.
These results suggest that commercial banks in Uzbekistan do not help households smooth their consumption over time with loans and investments. They spend when they must—rather than, say, buying a car when prices are low, or spacing out payments on a car loan over time.
In fact, when Uzbekistan income is a hypothetical zero, consumers spend more than two billion international dollars per year, probably with foreign assistance (see Table 1).
Uzbekistan is a successful transition economy. Its size has quadrupled since 1987 (see Figure 3). Nevertheless, the consumer sector has not progressed as far from the traditional bukhara was one would like. One reason may be the weakling financial market.
Table 1: Consumption function for Uzbekistan, 1995-2022
R Square 0.987
Standard Error 2.78E+09
Observations 28
ANOVA
Df SS MS F Signif. F
Regression 1 1.54E+22 1.54E+22 1993.92 0.000
Residual 26 2.01E+20 7.74E+18
Total 27 1.56E+22
Coeff. t Stat P-value Lower 95% Upper 95%
Intercept 2.25E+09 1.904 0.068 -1.8E+08 4.68E+09
GDP 0.763 44.653 0.000 0.728 0.798
Table 2: Consumption function in Uzbekistan with a time trend
R Square 0.992
Standard Error 2.21E+09
Observations 28
ANOVA
Df SS MS F Signif. F
Regression 2 1.55E+22 7.75E+21 1586.201 0.000
Residual 25 1.22E+20 4.89E+18
Total 27 1.56E+22
Coeff. T-Stat P-Val Lower 95% Upper 95%
Intercept 9.45E+08 0.950 0.351 -1.1E+09 2.99E+09
GDP 1.005 16.277 0.000 0.878 1.132
Time -9.5E+08 -4.019 0.000 -1.4E+09 -4.6E+08
--Leon Taylor, Baltimore tayloralmaty@gmail.com
Figure 3: Real GDP in Uzbekistan (in constant som)
Notes
The data in the tables are from the World Bank’s World Development Indicators for 1990 through 2022. GDP is gross domestic product. Time gives the number of years that have passed since 1990, where Time = 1 for 1990. Consumption is personal consumption expenditures. GDP and Consumption are expressed in 2017 international dollars, using purchasing power parity.
For useful comments, I thank but do not implicate Annabel Benson.
References
World Bank. Market capitalization of listed domestic companies (% of GDP) | Data (worldbank.org)
World Bank. What does “Finance for an Equitable Recovery” mean for the Kyrgyz Republic? (worldbank.org)
World Bank. World Development Indicators. www.worldbank.org
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